Contract Farming, Smallholders, and Rural Development in Latin America: The Organization of Agroprocessing Firms and the Scale of Outgrower Production

This paper demonstrates how contract farming functions as an economic institution and explores the causes of the observed variation in the scale of outgrower production in Latin America. We outline how market imperfections and transaction costs influence the decision of agroprocessing firms to contract-out, vertically integrate, or use spot markets to obtain raw product. The paper demonstrates how market conditions are likely to be associated with particular outgrower characteristics under contract farming. An analysis of the Mexican frozen vegetable industry illustrates determinants of successful and unsuccessful small-scale contracting and suggests alternative policies to promote contract farming with smallholders.